The Signal - Episode 2: Feeling the squeeze: how grocers and suppliers are dealing with inflation

  • Multi Asset
  • Consumer
  • Global

Third Bridge’s Global Sector Lead for Consumer, Alex Smith, and Alex Brown, CEO at Baleigh Investments, discuss the many pressures facing retailers and suppliers amid today’s cost of living crisis. We also cover how the competitive landscape is evolving, and the contrasts between emerging and developed grocery markets.

The cost of living crisis is compounding an already delicate situation for suppliers and grocers in the aftermath of COVID-19 and Brexit. The retail market is as competitive as it has ever been and private label suppliers in particular are suffering from the many pressures facing the industry; although grocers in the main eventually pay the right price, they “always delay, they always negotiate”, Alex Brown said. 

While the day of the “megamerger” among larger suppliers has passed, our panellists said more consolidation could be on the cards, especially at the private label level. Some are “going under already” because they have struggled to be profitable and tend to have less sophisticated supply chains. “If you’re a scale player with a strong balance sheet, you’re going to get some really good opportunities over the next 12 months to expand your business.”

As Smith also noted, strained P&Ls have previously been a catalyst for consolidation. “And certainly, the experts that we have talked to think this is going to be an ongoing trend.” At the same time, he pointed out that the inflationary environment could delay restructures: “You look at a company like Unilever, there’s a lot of agitation that Unilever should break itself up across its different categories. But clearly, in this period of significant inflation, having that scale will be beneficial.”

With so many dynamics impacting grocers and suppliers, the competitive landscape has been shifting in recent years. Recent data shows that discounters are “winning market share” while traditional retailers are losing share – with the “notable exception” of Tesco, Brown said. The continued rise of German discounters Aldi and Lidl could push Aldi into “big four” territory in as little as six months. Home Bargains was also highlighted as one to watch, with plans to take its number of stores to 1,000.

With the sting of inflation rippling around the world, Smith said the trends being observed in the UK are similar to elsewhere, noting some important dynamics: currency and emerging versus developed markets. “People don’t often appreciate how much more of a burden the dollar appreciation has on your cost inflation basket in emerging markets, or even in the UK or in Europe,” he said. Emerging markets are also more vulnerable to volume elasticity, as volumes suffer more when prices rise.

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The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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